Reward Beta CAPM. CAPM Reward Beta.

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1 Reward BetaCAPM CAPMReward Beta FtR 2 DW CAPMReward Beta CAPMReward Beta Farzin.rezaei@qazviniau.ac.ir

2 . ( CAPM ) (CML) CAPM 1. Harry Markowits 2. Wiliam Sharp 3. Capital Assets Pricing Model(CAPM) 4. Systematic Risk 5. Nondiversifiable 6. Graham Bornholt

3 Reward Beta CAPM 0 RB APTCAPM CAPM CAPM 0 CAPM CAPM Rf CAPM E(Ri) = RF +i [ E(RM) RF] i RFE(Ri) 1. Arbitrage Pricing Theory(APT) 2. Reward Beta Approach(RBA) 3. Lintner 4. Black

4 E(RM) CAPM CAPM CML SML SML CAPM BJS, FM CAPMSML 1. Reinganum Reinganum

5 Reward Beta CAPM Reward Beta RB APT CAPMRB CAPM 0 E( R ) [ ( ) ] i = RF + β i E RM RF irfe(ri) E( Rm) CAPM i Cov[ E( Ri ), E( R B i = Var[ E( R )] )] 1. Benz 2. Bhandari 3. Stattman 4. Rosenberg, Reid & Lanstein 5. Size Firm 6.Book to- Market Value(BE/ME) 7. Leverage M M

6 0CAPM i Bi Bri E R ) = R + βr [ E( R ) R ] ( i F i M F M E( Ri) RF β i = E( R ) R F CAPM E( Ri) RF βri = E( R ) R M F r (β ) [E(Ri)-RF] [E(RM)-RF] 0 1.Security,s Risk Premium 2.Market Risk Premium

7 Reward Beta CAPM RB RB RB CAPM Cov[ E( Ri ), E( R Bi = Var[ E) RM )] M RBM )] [ E( Ri ) RF ] Bri = [ E( RM ) RF ] APT (Ri) E(Ri) ~ ~ R = E( Ri) + Ui ~ ~ (m ) ~ ( εi)

8 ~ Ri = E( Ri) + m ~ + ~ ε i APT ~ ~ ~ ~ Ri = E( Ri) + β F + β F β N F + ξi m ~ E( Ri) = RF + βri [ E( RM ) RF ~ R = R i F + βr[ E( R i 1 ~ ~ Ri = E( Ri) + β [ R E( R )] + ~ εi i 2 M M 2 ~ ) R ] + β [ R F 2 M ERi ] Reward Beta Model Reward Beta i M E( R N M )] + ˆ ε i 1.Jose Robertosecurato & Pablo Rogers

9 Reward Beta CAPM Reward Beta.CAPMReward Beta

10 Ri B/MSize H SH SL L B/M S/H S/SH S/SL S/L S SS/H SS/SH SS/SL SS/L SS SB/H SB/SH SB/SL SB/L SB B/H B/SH B/SL B/L B.

11 Reward Beta CAPM Ft.Microfit 4..RBM Rf CAPM Reward betacapm Size Small Book to Market Low Average Percent Excess Returns High

12 Big CAPM Betas Small Big Reward Beta Small Big Reward Beta CAPM i,r

13 Reward Beta CAPM REGRESSIO N Reward Beta Coefficient Standard Error T-Ratio[Prob] Intercept CAPM beta Reward beta R 2 - Sqaured CAPM Coefficient Standard Error T-Ratio[Prob] CAPM RrFt CAPMReward Beta RBM CAPM Reward Beta

14 CAPM Reward Beta. F Reward CAPMBeta CAPMReward Beta J- DWB J-B Reward Beta CAPM DW J-B Functional Form

15 Reward Beta CAPM OLS CAPM 1 Functional Form 2 Ramsey's RESET

16 CAPM CAPM. CAPMReward Beta. CAPM R 2 RBM CAPMRB CAPM Reward Beta

17 Reward Beta CAPM CAPM RBM C-CAPM ICE 1.Conditional Capital Asset Pricing Model 2.Implied Cost of Equity(ISE)

18 CAPM Allen D. E. and Cleary,(1998), Determinats of the Cross-Section of Stock Section of Stock Returns in the Malaysian Stock. Market International Review of Financial Analysis. Vol. 7, No. 5, PP Bagherzadeh, Saeed,(2003), The Cross-Section of Expected Stock Returns in Iranian Stock Market: Some Empirical Evidence. The Iranian Journal of Financial ResearchVol.15, PP

19 Reward Beta CAPM Bartholdi, Jan & Paula Pear,(2002), Estimation of expected return: CAPM vs. Fama and French, Working Paper or DOI: /ssrn Benz, Rolf. W.,(1981), The Relation Between Return and Market Value of Common Stock. Journal of Financial Economics 9, PP Bornholt. G.N.,(2006), Expected Utility and Mean-Risk Asset Pricing Models. Working Paper. Griffith University Department of Accounting. Accounting and Finance, Vol. 47, No. 1, PP , March Access on June of 2007 Bornholt, G. N.,(2007), Extending the Capital Asset Pricing Model: the Reward Beta Approach Journal of Accounting and Finance, Vol. 47, PP Daniel, K., Titman, S.,(1997), Evidence on Characteristics of Cross Sectional Variation in Stock Returns. Journal of Finance,Vol. 52,PP Davis, J.L., E.F. French(2000), Characteristics, Covariances, and Average Returns. Fama, Eugene. F., and James D. MacBeth,(1973), Risk, Return, and Equilibrium: Empirical Tests. Journal of Political Economy 81(March), PP Fama, Eugene. F., and Kenneth R. French,(1992), The Cross-Section of Expected Stock Returns. Journal of Finance 47, PP Fama, Eugene. F., and Kenneth R. French,(1993), Common Risk Factor in the Return on Stocks and Bonds. Journal of Financial Economics 33, PP Fama, Eugene. F., and Kenneth R. French,(1996), Multifactor Explanations of Asset Pricing Anomalies Journal of Finance 51, PP Fama, Eugene. F., and Kenneth R. French,(2004), The Capital Asset Pricing Model: Theory and Evidence, Journal of Economic PerspectivesVol. 18, PP Kotari, S.P. and Jerold. Bwarner,(1997), Evaluating Mutual Fund Performance, Laconishok, Josef. and Anolrei, Shleiter, and Robert W. Vishny,(1994), Contraries Investment, Extrapolation. And Risk, The Uournal of Finance 12, PP Markowitz, H,(1959), Portfolio Selection. New York: J. Wily and Son. Old Corn, Roger& Parker, David(1996) The Strategic Investment Decisions.

20 Publishing. Pablo Rogers, Jose Robertosecurato,(2008), Comparative Study of CAPM, Fama and French Model and Reward Beta Approach in the Brazilian Market, Roll, R.,(1976), A Critique of the Assets Pricing Theorys Tests: Part1: On Past and Testability of the Theory, Journal of the Financial Economics, 4(2),PP Roll, R. and Ross, S.,(1994), On the Cross-Sectional Relation between Expected Returns and Betas. Journal of FinanceVol. 49,PP Rahnama Roodposhti.F &Shaverdiyan& Irani,(2010), Investigation of Revised Beta based on R-CAPM in Comparison withreward Beta based on CAPM for Forecasting Expected Rate of Return, Hannover Conference Sharpe, W. F.,(1964), Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk,Journal of Finance,Vol. 19, PP